January 30, 2012 7:35 pm

A new page opens for Facebook

Stock market launch is biggest test yet for the social network phenomenon

Before lifting his head from his pillow in the morning, Sam Van Dellen reaches for his smartphone, opens Facebook and scrolls through the news headlines and personal updates his friends have posted. “Yay! Oatmeal,” reads one wake-up message from a friend.

It used to be that people crawled out of bed and sat down with the newspaper. Then email became the first thing many looked at. Now, people such as Mr Van Dellen, 31, a bicycle mechanic from Chicago, are leading the next shift where the social networking site becomes the first and primary source of information – about their friends and the world. “I’d rather not read the news,” he says. “I have such a broad spectrum of friends, I feel like I get a broad swath of news from them.”

facebook

facebook

After insinuating itself into every corner of its users’ lives, the internet phenomenon has its eyes set this week on launching the process that will lead to its long-awaited initial public offering. What began as a university dormitory stunt is evolving into a social filter that is shaping how people and businesses behave online. Now, with its impending debut on Wall Street, it is set to take the final step in its transition from precocious adolescent to mature corporate power.

What kind of adult it will turn out to be – how it will wield that power, and whether its influence will be as pervasive as supporters predict – are the questions that now loom large. Given the prodigious success of its first eight years, expectations are high: to some, it has already embedded itself into the fabric of the internet – a utility that will become a fact of life for all online users.

“Facebook is today what the telephone was 50 years ago,” says Rob Coneybeer, managing director at Shasta Ventures, a Silicon Valley venture capital firm. “To say now, ‘I don’t use Facebook’ is like saying then, ‘I don’t use the telephone, I only do business in person’.”

Yet the pervasive influence implied by predictions of that nature is not a given. The move to Wall Street signals the biggest test yet of whether a company whose ambitious expansion has often struck jarring notes over issues such as user privacy can live up to the expectations.

At the latest count, the network had 800m active users. This year, it is on course to reach 1bn, meaning 14 per cent of the world’s population will be visiting at least once a month. Facebook aims to develop new things for people to do on the site that keep them coming back and sharing more. Its most recent function turns a corner of someone’s profile page into an online scrapbook, logging with just a few taps every sushi roll they eat or each U2 song they listen to.

The same network effects that it uses to keep people glued to the site have meanwhile been deployed to build a multi-billion dollar advertising business. Now, companies have almost no choice but to be on Facebook, on alert for mentions of their products and the potentially viral spread of a comment about them. “The people own your brand now,” says Leslie Berland, head of social media at American Express, the card issuer. “They define the conversation and the way your company and brand are being viewed. It’s critical to be part of that conversation.”

As Facebook positions itself to become a public company with a possible $100bn valuation, it is still reconciling its ragtag roots with a rule-abiding adult persona that must engage with Madison Avenue advertising executives and Wall Street bankers, not to mention political leaders and officials from Washington to Brussels and beyond.

When Mark Zuckerberg and his friends founded the company in 2004, they and their team of engineering twentysomethings found success by rebelling against convention. Their modus operandi was to work fast, make mistakes, then quickly correct them. The company has endeavoured to maintain as much of that hacking culture as possible, to stay ahead of larger, wealthier rivals in the technology industry that want in on its turf.

But as the group grows into a mature business, it treads more and more into complex territory. Mistakes carry much larger consequences now, and Facebook has yet to find the sweet spot on a number of fronts.

Privacy wars with regulators and users are bound to continue, particularly as Facebook seeks to become more profitable and answer advertisers’ demands for more information about users. Alliances and enmities in the technology and media worlds will harden as Facebook takes a 30 per cent cut from gaming, music and film companies that sell digital goods on its platform. And the users who embraced Facebook and turned it into an indispensable part of life must be protected from fatigue caused by intrusive ads and privacy breaches.

“Facebook’s challenge is going to be to maintain that indispensability in a very, very rapidly evolving landscape,” says Rebecca Lieb at Altimeter Group, an advisory company. “AOL had that level of ubiquity, Yahoo had that level of ubiquity, and they both failed to maintain it.”

. . .

Early last year, Facebook invited a group of British advertising leaders to its California headquarters as part of a courtship of marketers to persuade them of the benefits and, as the company increasingly casts it, the inevitability of advertising on Facebook. The bejacketed middle-aged guests sat around a conference table as Andrew “Boz” Bosworth, Facebook’s director of engineering, stood before them in jeans, sneakers and a T-shirt, the tattoo on his left wrist flashing as he waved his hands and talked fast.

His speech, though casual, was dominated by a strain of wisdom that seemed to sway his elders. He talked about the word-of-mouth power of Facebook and its impact on truth in advertising. No longer would agencies be able to sell a bad product with a clever campaign, Mr Bosworth declared. “But for ad agencies that are good at what they do – it’s Christmas,” he added. “Because people will be talking about what you do and sharing it with their friends.”

Social advertising: Lower costs and a more enduring personal relationship

Just as the ever-growing Facebook community uses the site to champion – or jeer – politicians from Barack Obama to Hosni Mubarak, so it has become a forum to complain or rave about companies, from United Airlines to Oreo cookies.

Facebook has deftly harnessed this to pioneer social media marketing, selling its platform to Madison Avenue as a must-have medium for advertisers. A sales team – run out of offices in California, Ireland, India and elsewhere – invites businesses to build a Facebook page from which they can reach 800m potential customers, and buy various forms of “social advertising”, which rely on the network’s wealth of data about users’ interests and friend connections to tailor and target ads.

“That is of immense, immense value to advertisers,” says Rebecca Lieb of Altimeter Group, a research company. “It’s one great leap towards the nirvana of digital advertising, which is getting the right message to the right person at the right time.”

Starbucks, the coffee retailer, created its first page a few years ago to communicate with customers and fans – and monitor discussions to discover details of what people liked or not. It then shaped paid advertising campaigns around those details – such as offering a promotion for its Pumpkin Spice Latte – to draw more people to its Facebook pages, which have 40m fans. “It has given us the ability to lower our cost of customer acquisition in terms of traditional advertising and build a more enduring, emotional relationship with our customers,” Howard Schultz, Starbucks chief executive, told investors last week.

Every time Facebook showed the ad to 1,000 people, or every time a person clicked on one of the ads, Facebook got paid. Ad prices vary, but average less than $1 per click, according to recent estimates. More than 90 per cent of Facebook revenues come from advertising, according to EMarketer, a research firm.

A newer strategy involves a proprietary currency: Facebook Credits. Users purchase credits– $1 buys 10 units – to gain virtual goods in social games, such as cows and goats in FarmVille or digital products including music and films. For every sale, Facebook takes a 30 per cent transaction fee from the gaming company, label or studio.

Facebook has made credits mandatory currency for gaming companies. They remain optional for media businesses but analysts expect that to change, setting Facebook up for a battle with industries that are straining to maintain their own dwindling margins.

Facebook is so far succeeding in convincing advertisers that the social network is a place they must be. In the past year, it overtook Yahoo to become number one in online display advertising revenues, taking 16.3 per cent of the market, says EMarketer, a research firm.

But it is not just access to 800m users that makes advertisers excited. It is all the information about those people’s social connections and affinities that Facebook has collected. “They have a consumer database of interests and actions and feelings and thoughts,” Nicola Mendelsohn, president of the Institute of Practitioners in Advertising, an industry grouping, says about the company. “It gives us a huge amount of scope.”

The ability to tailor and target marketing messages so finely is something of which advertisers had only dreamt. And as they start to itch for more definitive financial returns on their investments – something Facebook has struggled to demonstrate consistently across industries – the granular data could be the key to keeping them happy and spending.

But the more data advertisers demand, the trickier it becomes to balance the interests of its users. Facebook crossed the creepiness threshold with several of its ad products, which deliver marketing messages on behalf of a company with the name and photograph of a user’s friend attached. In November, the company settled its first privacy complaint from the US Federal Trade Commission, which had accused it of improperly sharing users’ information with other users and with advertisers. The deeper Facebook gets into the data business, the more careful it must be with its user base. “Will consumers feel used and abused by it?” asks Ms Lieb. “That remains to be seen.”

It also remains to be seen how tolerant Wall Street and Washington will be of such mistakes once Facebook becomes a quoted company. Mr Zuckerberg, the 27-year-old chief executive who is, above all, a computer geek, has surrounded himself with an entourage of skilled business leaders to help bridge the cultural gap between the engineers at its 1 Hacker Way headquarters in Silicon Valley and the advertising giants on Madison Avenue in New York and the political insiders on Capitol Hill.

“No one can be successful on their own,” says Matt Cohler, a partner at Benchmark Capital, a venture group, and a former vice-president of product management at Facebook. “Mark is extraordinary. One of the things that makes him extraordinary is he has recruited an extraordinary team.”

Sheryl Sandberg, who joined the company in 2008 as chief operating officer, was his most valuable find. The former Google sales executive has not only forged Facebook’s monetisation strategy but has also plundered the search company’s ranks to fill top business and operational slots, from David Fischer, vice-president of advertising, right down to the head chef.

While the engineering team also has some recruits from Google – such as Bret Taylor, Facebook’s chief technical officer, who was responsible for creating Google Maps – many of them are, like Mr Zuckerberg, brainy college dropouts or recent graduates in their first job. “When Facebook does go public, it will be hard to hold on to the culture,” says Ms Lieb. “They will have attrition problems, they’ll have newly minted millionaires that will cash out and go out into the world.”

. . .

All through, Mr Zuckerberg has ensured that he maintained control. When negotiating with venture capitalists, contracts had to be clear he would never be replaced by an “adult” chief executive. Even once the company is public, Mr Zuckerberg and his allies will retain voting power.

“He doesn’t want to be pushed around by Wall Street,” says David Kirkpatrick, author of The Facebook Effect, a company history. “Wall Street is insistent on short-term returns. Facebook will do their best, as Google has, to disregard that and focus on the long term. But they will continually be pressured and asked and lobbied to do things that help investors make money sooner. I don’t think Mark is going to like it.”

Ultimately, Mr Zuckerberg’s task will be to show investors that they are as beholden to Facebook’s users as he is. To be a successful public company that generates returns for investors, and a successful vehicle for advertisers, Facebook must first answer to the Sam Van Dellens of the network. “Facebook is the centre of my social life online,” says Mr Van Dellen. “I would consider going to another network, but there isn’t one. And all my friends are on Facebook.”

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